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Department of Agricultural Economics and Rural Sociology, Pennsylvania State University, University Park 16802
Corresponding author: K. W. Bailey; e-mail: baileyk{at}psu.edu.
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ABSTRACT |
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 TOP ABSTRACT INTRODUCTIONMATERIALS AND METHODSRESULTS AND DISCUSSIONCONCLUSIONSREFERENCES |
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Key Words: harmonized tariff schedule • milk protein concentrates • tariff rate quota
Abbreviation key: CIF = cost, insurance, and freight, FOB = free on board, MPC = milk protein concentrates, NMPF = National Milk Producers Federation, HTS = harmonized tariff schedule, WTO = world trade organization
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INTRODUCTION |
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TOPABSTRACTINTRODUCTIONMATERIALS AND METHODSRESULTS AND DISCUSSIONCONCLUSIONSREFERENCES |
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Milk protein concentrate is essentially a dairy protein that is either liquid or spray dried. Most imported MPC is made from skim milk that is ultra filtered in order to separate the milk (casein and whey) protein from lactose. The filtration process results in a final form that contains varying levels of protein depending on end product use. The resulting retentate is then spray dried. Some MPC imports are actually blends of casein and nonfat dry milk. The NMPF has petitioned the U.S. Customers Service classification of MPC to exclude blends of other dairy products such as skim milk powder, whey protein, and casein (Cheese Market News, 2003). Imports of skim milk powder by itself would face a tariff rate quota, but blended in MPC, it would face a relatively low tariff.
Milk protein concentrate is used in the United States in many different products, including the starter culture of cheese or in nonstandard cheeses such as baker’s cheese, ricotta, and Feta and Hispanic cheese, as well as various processed cheese products. Those cheeses with a standard of identity from the US FDA, which includes most natural cheese produced in the United States, are not allowed to use MPC outside of the starter culture. Milk protein concentrate is also used in ice cream and nutritional drinks. It is a very functional product for food processing because it can vary the protein-to-lactose ratio, even the protein-to-fat ratio, of the processed product. Milk protein concentrate is preferred in cheese production over skim milk powder because it adds a desirable product—protein—and excludes the extra costs of removing lactose.
There are two major import classifications of milk proteins. These classifications are based on the harmonized tariff schedule of the United States (HTS), which was established under the World Trade Organization (WTO). One MPC classification is HTS Chapter 4 (HTS code 04049010), which is defined as a dried dairy product that is at least 40% protein. Chapter 4 MPC can be made to alternative protein specifications such as MPC 42, 56, 70, and 80% protein depending on end use (Jesse 2003). Another MPC classification is CN products under HTS Chapter 35. This would include Chapter 35 MPC (HTS code 35011010), a 90% protein version of MPC obtained by a precipitation process; casein (HTS code 35011050), which is a milk protein made by treating skim milk with acid or rennet; and caseinates (HTS code 35019060), which is derived from CN by dissolving it in an alkaline solution of sodium or calcium in order to make the product soluble in water.
Imports of Chapter 4 MPC rose 18.1% in 2002 from a year ago to 33,626 t. There is no tariff rate quota on imports of MPC, just a low tariff rate of $3.70 per t in 2002. The lack of an import quota and a low tariff rate explains part of the reason why MPC imports have grown in recent years. An earlier study by this author concluded that MPC imports rose in those years when the world price of skim milk powder (a reflection of world protein prices) fell significantly below the US support price level (Bailey 2002). The Northern European price of skim milk powder fell from a high of $2200/t in September 2000 to a low of $1163/t in August 2002. That compared to a US support price of $1984/t for most of 2002. (The purchase price of skim milk powder fell to $1764 beginning in November 2002.) This gap between the US domestic support price and the low world price in 2002 made it attractive to import MPC into the United States. Increased imports of MPC then displaced domestic consumption of skim milk powder, resulting in increased government purchases under the dairy price support program.
One of the difficult aspects of trying to assess the impact of MPC imports on the US dairy industry is to quantify the protein content of these imports. Chapter 35 MPC derived from a precipitation process contains about 90% casein. United States Customs classifies Chapter 4 MPC, however, as a product with from 40 to 90% milk protein. Thus, some knowledge of the average protein content of imports is required in order to analyze the market implications. The purpose of this study is to develop a methodology to estimate the protein content of Chapter 4 MPC on a country by country basis. Such an estimate would not only provide information regarding the quantity of protein in MPC imports, but it would also provide a country by country profile of low- and high-value MPC importers. This is critical for market analysis since it is the lower valued MPC imports that more directly displaces U.S. produced skim milk powder. It is also the protein content in MPC imports that directly affects cheese production and hence cheese prices.
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MATERIALS AND METHODS |
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The relationship between market prices in the exporting and importing country can be conceptualized in the price transmission equation. This relationship has been studied in earlier studies by Tweeten; Johnson; and Bredahl, Meyers, and Collins. The price transmission equation is described below.
Start with the price of MPC in an exporting country, in this case New Zealand:
 | ([1]) |
where 
is the average price of MPC in New Zealand, 
is the average percent protein for MPC exports from New Zealand, and 
is the market value of pure protein in New Zealand.
The price transmission equation between an exporting country like New Zealand and the United States is expressed below:
 | ([2]) |
where 
is the domestic price of MPC at the border of the United States, C reflects costs such as U.S. tariffs, transportation costs from the dock to a plant just inside the United States and other importing costs like warehousing, and T is the cost of insurance and freight from the exporting country to the United States. Like equation [1]
above, the US price of MPC imports from New Zealand at the border can be expressed as a function of the US pure protein price as follows:
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where 
is the market value of pure protein at the US border, and reflects the implied protein percent of imports from New Zealand.
Using equations [2] and [3], one can solve for as follows:
 | ([4]) |
To illustrate, we will compute the average protein content of MPC imports from New Zealand in 2002. The USDA Foreign Agricultural Service’s trade database provides the cost, insurance, and ocean freight (CIF) value; the free on board (FOB) value; and quantity of MPC imports from New Zealand. The FOB price reflects the market value of the product at the dock of the exporting country and therefore does not include ocean freight or insurance. Imports of MPC from New Zealand in 2002 were 20,609.5 t. The CIF value was $77.354 million, and the FOB value was $75.172 million, both for 2002. Thus the CIF and FOB values for 2002 were $3753 and $3647 per tonne, respectively.
A discussion with an importing broker reveals the actual cost of importing dried protein products like MPC into the United States. Ocean freight costs are anywhere from $100 to 200 per tonne, plus $3 to 4 per tonne for insurance. Tariff costs for MPC imports in 2002 were $3.70 per tonne. Other importing costs are customs fees and harbor maintenance, which equate to about 0.25% of the import value. The freight forwarder charges $200 to $250 per bill of lading, which could represent several containers each of which holds 20 t of product. Inland freight charges from port to plant are about $750 per container. And warehouse charges at the port are $200 per mo per container. Other charges to consider are financing costs, insurance for inland transit, and profits for the importer. Excluding ocean freight and insurance, all importing costs for MPC are typically no more than 5% of the import value.
For our example, assume that the cost of freight and insurance from New Zealand to the United States for MPC, referred to as T in equation [4] above, was $106 per t in 2002. This is based on the difference between the CIF and FOB values published by USDA. Thus, the only variable missing from equation [4] is the market value of protein in the United States.
Most exporters of MPC to the US set prices in relation to the market value of protein in skim milk powder. Skim milk powder is readily traded in world markets and price information is publicly available. For food processors considering MPC or skim milk powder in cheese production, the value in skim milk powder is all in the protein, because they must remove any lactose later in the production process. Prices for MPC at higher levels of protein (i.e., 70 and 85%) can thus be set at a premium relative to the base value of protein in skim milk powder. For example, in a recent market outlook report from NZMP, the dairy ingredient marketing arm of Fonterra Co-Operative Group Ltd., New Zealand, the market outlook for protein products in the United States for the 2003/2004 fiscal year was higher for those products that had a protein content that exceeded that of skim milk powder. After dividing by protein content, the market prices were $4921 per tonne for skim milk powder (36.2% protein), $5669 per tonne for MPC 70, and $6453 per t for MPC 82 (NZMP 2003).
One can therefore compute the market value of protein on the West coast for 2002 (Source: USDA Dairy Market News, various editions). The West Coast price of skim milk powder in 2002 was $1985.5 per tonne. Considering that this product contains 36.2% protein, that would imply a protein price of $5485 per t (USDA-ARS 2002). Substituting this into equation [4] above would imply that 2002 imports of Chapter 4 MPC from New Zealand contained 71.7% protein.
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RESULTS AND DISCUSSION |
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for all major MPC-importing countries.
Data on Chapter 4 MPC imports and FOB values are used next to estimate protein percents on a country-by-country basis. The source for this data is USDA’s Foreign Agricultural Service’s U.S. Trade Internet Service. To use this internet service, simply select the HTS code level 8 to 10 for imports. Then select World Total, enter the HTS code 04049010 for Chapter 4 MPC imports, select a time period, and then enter either quantity, value (FOB), or CIF value. The data for major importers and the rest of the world are provided in Table 1
. The data reveals that some countries export significant quantities of MPC to the U.S. in some years, only to fall to very low levels in other years. Overall, imports of Chapter 4 MPC’s increased 98% over the period 1997 to 2002.
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The CIF sales values were also available from the U.S. Trade Internet Service provided by USDA. The per-unit estimates of the CIF value (CIF sales divided by MPC import quantities) were estimated this way. The difference between the CIF per unit values and the FOB per unit values were assumed to be the cost of ocean freight and insurance. In those cases where the estimate fell below $100, it was assumed there was not sufficient volume of sales to provide a good estimate. Thus the estimate of T in equation [2] above was floored at $100. In addition, the estimate for C was kept at 5.0%.
A market value for pure protein in the United States is approximated next by dividing the West Coast price of US skim milk powder by the average protein content in skim milk powder of 36.2%. The source of this data was the USDA Dairy Market News Annual Summary (USDA, AMS). The market value of protein in the US western border fell steadily from $6490 per tonne in 1997 to $5485 per tonne in 2002. This steady drop was due to the "butter-powder tilt" that lowered the support price for skim milk powder and raised it for butter.
The computations above were next substituted into equation [4] in order to estimate the protein content of annual average MPC imports from major importers. The results are presented in Table 3. The results indicate that the average protein level in Chapter 4 MPC imports varied from a low of 48.3% in 1999 to a high of 67.3% in 2002. It is apparent from Tables 1 and 3 that lower-valued MPC imports from Canada and Europe increased significantly in 1999, lowering the average protein content of MPC imports. On the other hand, imports of MPC from Europe were reduced significantly by 2002 and were offset by slightly higher value MPC imports from New Zealand.
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should have a range of 40 to 88% protein. Yet the data range for just 2002 is 36 to 111%. The logical conclusion is that countries like Germany that had an estimated protein content of 36% in 2002 have discounted their MPC imports relative to US prices. On the other hand, countries like Ireland with an estimated protein content in 2002 of 111% have set a premium on their higher value MPC imports. Thus the estimates for Table 3 should be limited to no more than 88% and no less than 40% in order to get a practical estimate of the protein content of MPC imports. One can assume that the difference is largely due to discounts and premiums in the FOB value. |
CONCLUSIONS |
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TOPABSTRACTINTRODUCTIONMATERIALS AND METHODSRESULTS AND DISCUSSIONCONCLUSIONSREFERENCES |
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One of the first questions to be asked when debating new tariff legislation for MPC is: what economic damage has it caused? In other words, how has it impacted the US dairy industry including dairy farmers as well as processors? To address that question, one needs to know how much actual protein has been imported into the United States. One can make reasonable assumptions when analyzing Chapter 35 MPC, casein, and caseinates, since the amount of protein in these imports falls within strict ranges. That is not the case, however, with imports of Chapter 4 MPC, which technically range from 40 to 90% protein. This becomes a critical issue when one considers that Chapter 4 MPC imports increased 97.8% over the period 1997 to 2002.
This study developed a methodology to quantify the average protein level of Chapter 4 MPC imports from major MPC importing countries. This methodology provides a quantitative measure of the tons of imported protein that is potentially displacing US-produced protein. The results indicate that the protein in MPC imports averaged 52% over the period 1997 to 2002. This has a number of implications. First, it identifies which countries are importing high protein vs. low protein MPC. From a policy perspective, one can assume that lower valued MPC imports more directly displaces US-produced skim milk powder. Alternatively, it can be argued that higher value MPC imports do not displace US-produced protein and in fact fill a new market niche. Second, it quantifies how much the average protein content of Chapter 4 MPC changes from one year to the next. Third, it suggests that some countries are receiving premiums and others discounts on MPC imports relative to the US price of skim milk powder.
The major weaknesses with this approach are: 1) the results are not robust when import levels for some countries fall to very low levels, and 2) there is no way to quantify the premiums and discounts offered on MPC sales. The first weakness is easy to address. One could throw out country data in years when trade is very small. Also, one can aggregate countries into regions. An example is provided in Table 3, where two regions were aggregated: the European Union and other Europe. Finally, it would be very useful if further research were conducted to isolate and quantify both premiums and discounts. It would also be useful to know if there were any public subsidies that have been used to offset price discounting.
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